Reserve Requirement Ratio
Tue, Apr 15The Reserve Requirement Ratio (RRR), also known as the Cash Reserve Ratio (CRR), refers to the percentage of customer deposits and other liquid assets that commercial banks are required to keep either within their own institution or with the central bank.
The central bank establishes the RRR to ensure that commercial banks maintain sufficient assets to meet the demands of depositors, particularly during periods of unusually high withdrawals.
What is Reserve Requirement Ratio?
The Reserve Requirement Ratio (RRR) serves as an essential regulatory mechanism employed by central banks to manage the amount of funds that financial institutions, including commercial banks, must retain in reserve against their deposit liabilities.
This ratio is generally expressed as a percentage, representing the portion of a bank’s total deposit liabilities that must be maintained as reserves. These reserves can be kept either as cash in the bank’s vault or as deposits with the central bank.
What is the purpose of the Reserve Requirement Ratio?
The main objective of the RRR is to promote financial stability, ensure the efficient operation of the payment system, and execute monetary policy.
By modifying the RRR, central banks can affect the availability of money and credit in the economy, as well as regulate short-term interest rates.
When the central bank increases the RRR, banks must retain a larger share of their deposit liabilities in reserve, which diminishes the funds available for lending. This can result in a contraction of the money supply and tighter monetary conditions.
Conversely, when the central bank decreases the RRR, banks are allowed to keep a smaller fraction of their deposits in reserve, thereby increasing the funds available for lending and potentially leading to an expansion of the money supply and looser monetary conditions.
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